I like to keep an eye out for interesting trends in hedge fund 13F filings. These reports can be a great place to start when researching opportunities, but they only provide limited information, which is why I keep an eye out for investment trends.
A 13F does not provide any information on why a firm acquired a particular position. Still, a trend, like a series of acquisitions in a specific sector, may suggest that a manager believes the sector as a whole is undervalued.
One of the prevelant trends appeared in the second-quarter 13F of Daniel Loeb (Trades, Portfolio)'s Third Point.
According to the report, which details the equity holdings in the portfolio as of June 30, the hedge fund has around half a billion dollars invested in special purpose acquisition companies. Some of these were added to the portfolio in the second quarter, while others have been in the portfolio longer.
Position sizes range from just $190,000 to nearly $40 million. The firm also owns SPAC warrants, which are usually issued to the acquisition companies' initial backers as a bonus for providing funding and supporting the deal.
Owning the warrants can yield substantial returns if an acquisition is successfully completed and the value of the SPAC increases above its offer price.
Luckily, Loeb explained in his first-half letter to investors why he's so optimistic about the outlook for this sector.
Loeb on SPACs
Commenting on the then-recent announcement that the Securities and Exchange Commission would be treating SPACs in the same way it does traditional initial public offerings, Loeb wrote:
"The rationalization of the SPAC market plays to our strengths as investors who can underwrite assets, sponsors, and management teams who are compounding value through a cycle. Despite recent bumps, we think SPACs are here to stay; they give companies in earlier growth stages access to public markets and capital, and are expanding the market for listed companies, which had become smaller and more concentrated in recent years."
The hedge fund manager also said he believes the firm has an advantage as a SPAC investor because of its experience in venture capital and activist investing. Loeb wrote:
"Many of our most profitable ideas over the past few quarters blurred the lines that previously delineated our investment strategies, particularly public versus private investing. Similarly, the 'activism' we have historically applied to public equity investments has brought valuable experience in being an engaged shareholder that has allowed us to add value in other strategies like venture capital, negotiated event-driven transactions, distressed credit workouts, and structured credit offerings."
Put simply, it seems Loeb believes he has an edge when it comes to sniffing out undervalued SPACs with optimistic prospects. Third Point has experience as a venture capital investor and a developed network of connections, which can help generate the best deals for the group.
In his first-quarter letter, Loeb went on to give two examples of companies that met his SPAC investment criteria, these were FinTech Acquisition Corp V (FTCV, Financial) (now eToro) and Paysafe (PSFE, Financial), which was its largest private investment in public equity investment at the time.
Both of these companies exhibited all the qualities Loeb and his team look for in a SPAC, which are "companies with leading positioning in their respective verticals, strong growth driven by industry tailwinds, and excellent management teams with the backing of experienced SPAC sponsors."
Considering the unique advantages available to Third Point, it has the potential to be a successful SPAC investor.
However, this strategy is unlikely to be suitable for all investors, especially private investors who do not have access to the same level of information. Buying a SPAC just because a hedge fund owns it without further research could result in disaster.
